Fed's credit plan gets mixed results
The plaudits were mixed with criticism, however, for what analysts called the Fed's clumsy approach to announcing the deal. Some said that while the Fed deserved praise for its innovative response, it also deserved criticism for past failures to regulate lenders making risky mortgage and other loans or to more quickly realize the scope of credit and mortgage problems.
"We have on the one hand what I would call an ingenious, A-plus attempt to segregate and attack the credit problem ... it's a scalpel-like approach of really incredible ingenuity," says Allen Sinai, founder of consulting firm Decision Economics.
Sinai said the Fed broke new ground by setting up a system of auctions at which banks can bid for as much as $40 billion in loans to bolster reserves and hopefully gain more cash and confidence to lend.
The new approach allows the Fed to provide needed liquidity on a separate track from its deliberations on whether to cut interest rates to protect the economy.
But Sinai added that, "At the same time you have a Federal Reserve that actually let this problem bloom in the last six to nine months" and failed to see problems as banks made risky investments in high-risk instruments.
Others took issue with the way the announcement was made. The markets tanked Tuesday after the Fed announced it had cut a key interest rate by a quarter point to 4.25 percent, but didn't cut a separate rate for direct loans to banks by as much as expected.
The statement following the move did not provide a clear direction for future action. Then early Wednesday, the Fed announced the auction plan.
"The Fed is actually doing all the smart things," says Mike Englund, chief economist at Action Economics. "But you can't help but notice the clumsy ... statement yesterday and then today's move."
Sinai and Englund noted that Bernanke runs the policymaking Federal Open Market Committee - the Fed Board of Governors and 12 regional bank presidents - as a consensus builder, not a dictator.
That may sow confusion as markets try to interpret conflicting speeches by Fed officials. It may also make it more difficult for the Fed to prepare the markets for major decisions.
John Hancock Financial Services chief economist Bill Cheney noted Bernanke earlier caught grief for saying the Fed has a variety of tools, not just interest rates. "The whole idea that there is such a thing as unconventional monetary policy and, at times, it is a good thing to do, is spot on," Cheney says.
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